Financial pessimists have been forecasting that the U.S. dollar will become worthless because of runaway inflation induced by deliberate government policy or because this nation’s mounting debt causes investors to flee from the dollar as a store of value. The effects on 401(k) plans and other retirement savings will depend on the extent of dollar inflation and what defensive investment options your 401(k) plan offers.

Catastrophic Collapses

Spectacular currency collapses in history include Germany in 1923 and 1924, when inflation of the Mark saw prices double every two days. Hungary in 1944 and 1946 saw an even worse inflation of the Pengo where prices quadrupled daily. In the 20th Century, 27 countries underwent bouts of hyperinflation that forced people to turn to barter as their currency collapsed. Hyperinflation typically has been followed by currency reform and a new monetary unit worth up to trillions of the old currency unit. If the dollar underwent this type of hyperinflationary collapse and became worthless, then your 401(k) and any other investment expressed in dollars will also be worthless.

Defend Your 401(k)

If you anticipate runaway hyperinflation and a truly worthless U.S. dollar, your best move would be cashing out your 401(k) now and using the money to buy food, other bartering goods, and weapons to defend your barter stash. However, if you foresee significant but not catastrophic inflation of the dollar, you can make investments that are likely to preserve your 401(k)’s value against any reasonable inflation expectations.

Fund Investments

Most 401(k) plans limit you to investing in mutual funds or exchange traded funds (ETF). An ETF consists of stocks or bonds that track with a particular securities index like the Dow or S&P 500. A mutual fund consists of stocks or bonds chosen by portfolio managers to produce maximum returns. Both funds sell shares that trade on the major public stock exchanges. There are thousands of ETFs and mutual funds covering broad and niche investment areas, some of which will be solid defenses against inflation

Inflation-Resistant Areas

A diverse portfolio of inflation-resistant investments is your best 401(k) defense. Through mutual funds and ETFs, you can invest in basic sectors such as agriculture, pharmaceuticals and health care that produce things people must buy to survive. You can diversify into funds made up of dividend-paying companies with strong balance sheets such as utilities. You can diversify into foreign markets through funds that specialize in stocks and bonds of foreign companies. Then there are funds that specialize in inflation-indexed bonds like the U.S. Treasury’s Inflation Protected Securities where your principal increases with inflation. Don’t forget old standbys like gold, silver and real estate, which you can invest in by acquiring shares in mutual funds or ETFs that specialize in these areas.